The Carlyle Group (CG)

David Swenson - the investment manager of the Yale endowment - ushered in the private-equity era nearly three decades ago with his success in allocating part of the portfolio to "alternative" assets, writes Andy Kessler. The so-called Swenson model has been widely copied since, and last year 765 P-E funds raised $266B, up 11% from 2013.

Private-equity, however, has peaked, argues Kessler, noting a number of reasons, among them the ending of the three-decade-plus decline in interest rates, a slowdown in bank lending for the leveraged deals upon which P-E runs, and the threat of tax reform in which interest rate deductions for debt could be targeted.

Most importantly though, says Kessler, P-E is an economic growth killer. Buying out a drugstore chain and loading it with debt isn't investing in the productivity of the economy. Instead, it does just the opposite - generating wealth for the endowments and pension funds invested, but destroying it for the economy.

Kessler throws in one more reason P-E is done: The industry is fresh out of big targets. The bust of Energy Future Future holdings means utilities are out, and what's left in food following the Kraft purchase? Tech? Forget it, as the money required to service debt squeezes out what's needed for R&D.

At the prompting of at least one BNY Mellon (NYSE:BK) director, recruiting firm Spencer Stuart firm has come up with a list of potential candidates to replace embattled CEO Gerald Hassell.

Gregory Fleming, who runs wealth and investment management at Morgan Stanley (NYSE:MS), has been contacted about the position, Reuters reports.

Other potential candidates include Mary Erdoes, who runs JPMorgan's (NYSE:JPM) asset management business and Michael Cavanagh, a former JPMorgan executive who is now COO at P-E firm Carlyle (NASDAQ:CG).

Private-equity buyouts of $17.14B YTD are at their lowest level since 2012 as banks - with regulators looking over their shoulders - cut back on the amount of debt they'll extend for takeovers. Leveraged loan volume this year of $26.5B is 82% less than the same time frame in 2014, and the lowest since 2009.

Fewer and smaller deals, along with less leverage means less risk, but also means lower returns for buyout firms. It also means lower prices for sellers.

“The limitation on leverage has taken away some buying power and in some cases, created a gap between sellers’ expectations and the price that private-equity firms can justify paying,” says Carlyle Group's (CG-1%) Pete Clare.

According to S&P Capital IQ, 21% of P-E deals this year have been financed with leverage at or above levels deemed risky by regulators; that's down from 35% in Q4 and 60% in Q3.

Along with Carlyle, Blackstone (BX-0.9%) in its annual report warned leverage restrictions could hurt its business. Apollo Global (APO-1.7%) and KKR (KKR-1.2%) included similar language in both their 2013 and 2014 filings.

"This is one of the best periods, if not the best, to invest in global energy,” says Carlyle Group's (NASDAQ:CG) Marcel van Poecke after the P-E firm finished raising $2.5B for a new global energy fund which will increase its war chest for energy deals to more than $10B.

Van Poecke expects a buyer’s market to emerge outside North America in H2 of this year as executives accept lower valuations for their businesses; the way he sees it, P-E firms may have an advantage in an environment where most of the large oil companies say they are concentrating on cutting spending and maintaining dividends rather than seeking deals.

The soon-to-be new owners of Canadian rater DBRS, Carlyle Group (CG+0.2%) and Warburg Pincus hope to double or triple the company's market share over the next five to ten years. DBRS currently has 2% of the lucrative ratings market dominated by Standard & Poor's (MHFI+0.4%), Moody's (MCO-0.2%), and Fitch - the three combine for 95% market share, about the same as prior to the financial crisis.

A group led by Carlyle and Warburg hope expect to close on their more than $500M purchase of DBRS early this week.

Despite calls from regulators, investors, and critics in general, upstarts in ratings have struggled to make any headway against the Big Three. One notable obstacle: Many investors have bylaws requiring paper they buy to be rated by either S&P or Moody's.

Instead of challenging the group on its strongest turf - municipal and U.S. corporate debt - DBRS will look to for opportunity in Europe and emerging markets.

Count Carlyle Group's (NASDAQ:CG) Claren Road Asset Management among those who had checked into the hedge fund hotels otherwise known as Fannie Mae and Freddie Mac. An unfavorable court ruling sent their stock prices plunging in October, and Claren Road - which had put more than 10% of its assets into the GSEs - lost 9.7% that month. For all 2014, the fund lost 9.9%.

Investors pulled about $2.5B from the fund in Q4, reports MarketWatch, and AUM stood at $5.2B at year-end vs. $8.5B three months earlier. Claren Road has trimmed its holdings of Frannie, and instituted a policy limiting to 5% trades in noninvestment grade securities.

Hedge funds have mostly been a nice new line of work at P-E firms as they allow the companies to add billions in assets subject to management and performance fees. The deals market can be a bumpy one, and the hedge funds theoretically help smooth quarterly earnings for the firms.

Q4 economic net income of $181M down from $562M a year ago. Distributable earnings of $311M down from $400M. Net performance fees of $138M vs. $578M. Realized performance fees of $264M vs. $355M.

Total AUM of $194.5B vs. $188.8B a year ago. Fee-earning AUM of $135.6M vs. $139.9M.

Carry fund valuations up 1% during Q4, up 15% for the year. The public portfolio rose 7% during the Q, the private fell 1%. Excluding the impact of energy-related funds, public would have been higher by 6%, private by 19%.

“Challenges in energy and credit are likely to damp results,” says BofA's Mike Carrier, who expects the strongest quarter at Blackstone (BX-0.8%) and the weakest at Carlyle Group (CG-0.8%).

A Bloomberg survey of analysts finds them seeing a 73% Y/Y profit decline at Carlyle, 63% at Apollo Global (APO+0.2%), 60% at KKR (KKR-1.4%), and Blackstone - the most diversified - at just 32%.

The P-E industry is entering the later stages of a selling cycle which began in 2012 and has made investors a fortune, but now is under pressure to put a whopping $1.2T to work. It should find ample opportunity in the energy sector.

One of today's worst-performing sectors as oil tumbles below $48 per barrel is private-equity. It was late last year Blackstone's Steven Schwarzman told investors he was itching to buy into the dive in energy, a promise he made good on in the first session of this year. In general one would think the plunge is a good thing for the opportunistic types who manage these companies.

In late December, it was estimated buyout firms had lost a combined $11.7B in 27 publicly traded oil producers since June, and that was with oil nearly $10 higher than it is today.

Carlyle Asia Partners IV, a Carlyle Group (NASDAQ:CG) fund, has agreed to buy General Electric's (NYSE:GE) stake in Asia Satellite Telecommunications Holdings (OTC:AISLF) for as much as $483M and then make a buyout offer.

More than a dozen buyout firms - Blackstone (NYSE:BX), Apollo Global (NYSE:APO), and Carlyle Group (NASDAQ:CG) among them - have lost a combined $11.7B in 27 publicly traded oil producers since June, according to Bloomberg.

Apollo - the largest investor in EP Energy, for instance - has $5B invested in energy debt and equity. Carlyle has 10% of its $203B in assets in the industry, and Blackstone is the 2nd-largest shareholder in Kosmos Energy, and backs drilling projects off Ghana's coast and the Gulf of Mexico.

"It could be worse from here," said Greg Beard, who oversees Apollo's energy investments, at his firm's investor day on Dec. 11. "When the market has been in excess like it is now, you see price declines. With a change in the stance of OPEC from one of price protection to the protecting of market share, we're in excess for at least the next 12 months."

The Carlyle Group L P is a diversified multi-product asset management firm. The Company operates its business across four segments; Corporate Private Equity; Global Market Strategies; Real Assets; and Solutions.